Spansion (NASDAQ:SPSN) was spun out of AMD (NYSE:AMD) and Fujitsu last December and didn't generate much investor interest, as the stock price languished at around $13 per share for quite a while. While the price is now up a couple of bucks, my guess is that the market thus far has not been too interested in a money-losing flash memory manufacturer that also happens to make the "wrong" type of flash memory -- NOR flash rather than the sexier NAND flash manufactured by SanDisk (NASDAQ:SNDK), Samsung, and others.

However, after finding some admittedly tenuous signs that the NOR flash market may improve this year, I was finally motivated to take a closer look at Spansion.

What does Spansion do?
Spansion makes NOR (which, if you're interested, stands for the logic function "not-or"). The other predominant type of flash memory is called NAND ("not-and"). Each of these types of memory has applications for which it is well-suited. The data stored in NOR flash can be read very quickly and accessed randomly, which makes it suitable for storing code -- the instructions that allow cell phones and other electronic devices to operate. On the other hand, NAND flash is available in higher capacity, data can be written quickly, and unwanted data can be quickly erased. These traits are useful, for example, for storing large images recorded by a digital camera. So while NAND is great for storing large files like music and pictures, its lack of random-access capability means it's not of much use to store code.

Also, there are two broad categories in which flash memory is used: Removable storage and integrated storage. NAND flash is big in the removable storage category -- hence its use in digital cameras. Spansion, however, is focused on integrated storage, in which NOR memory is built into the device. The company further subdivides the integrated category into wireless devices and embedded. Portable electronic devices are included in the wireless category, with all others -- such as set-top boxes and automotive applications -- making up the embedded category.

Besides these applications, NOR flash is used in some degree in DVD players, MP3 players, and digital cameras, but the biggest market is cell phones. According to semiconductor market research firm iSuppli, nearly 70% of all NOR flash was used in mobile phones in 2005. Needless to say, Spansion's fortunes are tied primarily to the cell-phone market, and the company is aggressively developing new products for those customers.

The technology
Spansion and other NOR flash manufacturers, like Motley Fool Inside Value recommendation Intel (NASDAQ:INTC) and STMicroelectronics, are in a continuous race to increase the capacity of their memory chips. One method all of these companies have adopted to increase memory capacities is to store 2 bits in the same volume that previously stored 1 bit. Intel and STMicro accomplish this by extending the standard "floating gate" technology from a single-cell technology to multilevel cell, or MLC. Spansion, however, uses a different technology it has named MirrorBit. From an investment standpoint, it isn't important to understand the technical differences between these two approaches, but what is important is that Spansion claims MirrorBit is easier to manufacture because it requires 40% fewer critical steps. The result should be lower manufacturing costs and a lower percentage of defective chips that have to be tossed out. Last fall, Spansion introduced the world's first 1 gigabit NOR device, based on MirrorBit. The market seems to be receptive to the MirrorBit technology, because a growing percentage of Spansion's sales (30% in the most recent quarter) are MirrorBit products.

MirrorBit represents just one feather in the Spansion cap. The company also is trying to increase its presence in the mobile-phone market with a new type of flash memory called ORNAND (which stands for "or-not-and"). ORNAND is supposed to combine some of the best features of both NOR and NAND flash. Mobile-phone designers want to add all sorts of features to their high-end mobile phones, but doing so requires larger data storage capacity. Spansion is hoping that its current mobile-phone customers will not only continue to use its NOR flash but will also adopt its new ORNAND memory to add advanced features to their phones.

One way that Spansion intends to get ORNAND flash memory into cell phones is through its alliance with M-systemsFlash Disk Pioneers (NASDAQ:FLSH). The two are teaming up to produce high-capacity SIM cards for mobile phones.

Every GSM-standard mobile phone comes with these small memory cards. These hold the phone's number and can also hold contact information for a couple hundred people. Current SIM cards have low capacity by today's standards, topping out at around 64 kilobytes, but Spansion and msystems are combining ORNAND memory with cryptography and file system technology to create SIM cards that will have 1,000 times higher capacity.

The two companies hope that mobile-phone manufacturers will be drawn to the new SIM cards, which would provide digital rights management capabilities and allow them to add new functionality to cellular phones.

What could go wrong?
Any number of things could interfere with Spansion's plans, but one of the biggest problems is certainly the competition. Although Spansion is the largest provider of NOR Flash, with a 27.9% market share, Intel is right on its heels with 26.7%. No. 3 is STMicro, with 16.2% of the market -- and Nos. 2 and 3 are teaming up. Intel and STMicro recently announced they will collaborate to make their NOR Flash products with common specifications so that customers can easily substitute one for another.

A refocused Intel will certainly continue to be a formidable competitor, given its deep pockets and considerable manufacturing talents. One of Intel's advantages involves having to continuously shrink the size of semiconductor devices by investing in research and development and new manufacturing lines. While Spansion is trying to move more of its memory products to 90-nanometer feature sizes, Intel has already started sampling NOR flash chips at 65 nanometers. It will be able to produce a greater quantity of memory per wafer at 65 nanometers than at 90 nanometers, resulting in lower costs.

Unfortunately for Spansion, the problems associated with shrinking its devices are not likely to go away after the 90- (or even the 65-) nanometer transition is finished. The transitions are getting increasingly difficult and expensive, and Spansion's debt load, which stands near $650 million, is larger than its cash and marketable securities hoard of $450 million.

In addition, Spansion's ORNAND memory puts it in competition with NAND flashmakers that have made enormous capacity additions and need to find customers to buy all their chips. The world's largest NAND flash producer, Samsung, is targeting the handset market with its OneNAND products and last year gave Apple (NASDAQ:AAPL) favorable pricing on large quantities of NAND flash for the iPod nano. It wouldn't be surprising to see Samsung be similarly aggressive with handset manufacturers, although it doesn't seem likely that one handset manufacturer will be able to dominate the market as Apple has the MP3 player market.

Too many "ifs" right now
Spansion's price-to-sales ratio is about 0.9 now, which is very low for a semiconductor company -- if the business can grow and generate a consistent profit. I do plan to continue to follow the Spansion story, but the risks I have outlined above are enough to keep me on the sidelines for now.

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Fool contributor Dan Bloom owns shares of Intel and welcomes your comments. The Motley Fool is investors writing for investors.